Anytime you or your partner can give a gift or donation, it’s a way to show your charitable side, and you may qualify for some tax breaks as well. While donations to nonprofit charitable organizations are tax-deductible, a gift does not give the issuer any tax benefit. However, you will not be taxed on your gift as long as it comes in below a certain annual threshold.
What Are Gifts?
The IRS defines a gift as cash or property given to another individual or business. This can be something tangible, such as a car, or it can be the transfer of funds from one bank account to another. You cannot claim a tax deduction for a gift, but you will not have to pay a tax on a gift either as long as you stay below certain limits. When a gift is given, it is the donor who is responsible for the taxes, not the individual or organization on the receiving end.
Tax Rules on Gifts
You can get an annual tax exclusion on your gift for up to $15,000 if you and your partner file separately and $30,000 if you filed jointly. This means you will not have to pay a tax on your gift and you will not have to count it toward your lifetime tax-free gifting limits unless you go over that limit. If you do go over that limit, you will have to file a copy of Form 709 with the IRS so it can count the amount you gave that exceeded your annual exemption and deduct that amount from your lifetime exemption.
The lifetime exemption level is where the rubber meets the road: you will not owe any gift taxes on any gifts you give unless you go over that lifetime gift-tax exemption. Just where this exemption is pegged has been a bit of a moving target. As of 2019, the lifetime exemption is set at $11.4 million – the same as the exemption from the federal estate tax. The goal of linking the gift tax exemption level to the estate tax exemption is to prevent wealthy people from simply giving their estates to their heirs before they die as a way to avoid paying estate taxes.
How Donations Differ
A donation differs from a gift in that it is a cash or property transfer to a qualified charitable organized. These organizations, such as a charity or church, are qualified under Section 170 (c) and Section 501 (c) (3) of the Internal Revenue Code. Organizations under 170 (c) are considered public, while those under 501 (c) (3) are private groups. These donations to nonprofit groups can be deducted from your taxable income, providing your and your partner with a way to ease the burden of tax season.
Tax Rules on Donations
When the time comes to report your earnings, you can deduct up to 50 percent of your annual income with your donations to qualified charitable groups. You should keep all of your receipts for proof in the event of an IRS audit. Many charities will send you statements with information regarding your donation. To ensure you receive the proper deductions, be sure you keep any receipts received throughout the year.
Travis Ames has written for numerous publications since 2007 and has been writing instructional articles online since 2010. His areas of expertise are wide and include travel, politics, arts and entertainment, technology and finance. He currently lives in Portland, Oregon where he will begin teaching in the fall of 2011.